Borders Prepares to File for Bankruptcy

Borders, the beleaguered bookseller, is preparing to file for bankruptcy as early next week after efforts to refinance its debt faltered, people briefed on the matter said Friday.

The company had largely failed to persuade publishers to convert payments they had been owed since late last year into interest-bearing loans.

Borders itself had suggested two weeks ago that it might need to file for bankruptcy despite receiving a $550 million loan commitment from GE Capital. It has also been working on securing financing to support itself through a Chapter 11 filing, according to a person briefed on the matter.

“There have been constant inquiries by reporters, and stories written, regarding whether Borders is considering a Chapter 11 filing,” Mary Davis, a Borders spokeswoman, wrote in an e-mailed statement. “Borders is not prepared at this time to report on the course of action it will pursue.”

The move to file for bankruptcy protection was accepted by publishers as an inevitable move after years of declining profits and management turnover for Borders. In a desperate effort to preserve cash, Borders abruptly stopped paying publishers at the end of December. In late January, the company said it would miss another scheduled payment to publishers and landlords, sending the company into a deeper tailspin.

The $550 million loan proposal by GE Capital had several conditions attached, including raising $125 million in junior financing, mainly by persuading enough publishers to accept I.O.U.’s for their missed payments. But publishers instead pushed the bookseller to revamp its business strategy and close underperforming stores.

Publishers will now have to decide whether they will resume shipping new books to Borders, a practice that had all but stopped after Borders ceased paying its bills in December.

Borders currently operates more than 650 stores, including about 500 superstores, and employs 19,000 people. The company could close more than 150 of those locations, one of these people said.

Neither of Borders’ biggest shareholders — the company’s chairman and chief executive, Bennett S. LeBow, and the hedge fund manager William A. Ackman — has indicated a willingness to put new money into the bookseller, these people said. Mr. Ackman disclosed in a regulatory filing late last year that he would be willing to loan Borders up to $960 million to finance a merger with Barnes & Noble, the company’s bigger rival.

The company has been working with several advisers on a potential bankruptcy filing, including Jefferies & Company, the law firm Kasowitz, Benson, Torres & Friedman and the consulting firm AlixPartners, according to the people briefed on the matter.

Shares in Borders began falling on Friday after news of the bankruptcy filing’s timing was reported by The Wall Street Journal online, dropping to 25 cents in late-afternoon trading. Borders’ stock has fallen nearly 80 percent over the last 12 months.

The cash problems were widely anticipated by publishers, who had been watching Borders closely for years and worrying about the bookseller’s long-term health. The company had been battered by turnover in its executive ranks. In January 2010, for instance, Ron Marshall resigned as chief executive after barely one year on the job — the third person in the position in only three years. Several other top executives left the company last month.

Borders was also hurt by a difficult retail climate during the recession and by other strategic decisions. It was slow to retire its small-format Walden bookstore locations, and the company was late to develop its own e-commerce site. Even by this year, as e-books grew to make up about 9 to 10 percent of trade book sales, Borders’s online efforts never took off in a significant way.

Borders was once seen as one of the best booksellers in the business. The company was founded as a used book store in 1971 in Ann Arbor, Mich., by two brothers, Tom and Louis Borders. They sold Borders to Kmart in 1992, marking in retrospect what some people in the industry saw as the beginning of the company’s missteps. It was spun off from Kmart in 1995.

Analysts said that Barnes & Noble, its chief rival in bricks-and-mortar book-selling, made savvier real estate decisions. In Manhattan, for instance, Borders took on expensive leases that were seen as unsustainable, including one in the Time Warner Center; one directly above Penn Station; and one at the upscale corner of Park Avenue and 57th Street.

Even its author events became disorganized and unreliable in recent years, irritating authors and publishers.